Sen. Jon Kyl Raises Tax Hostage Scenario: Extend Bush Cuts For Payroll Tax Break

WASHINGTON -- Sen. Jon Kyl announced Monday what it will really take to extend a payroll tax holiday for the middle class: an extension of tax breaks for the wealthy.

The Arizona Republican, taking to the Senate floor after Democrats proposed a 1.9 percent surtax on income above $1 million to pay for the payroll tax break, argued that the tax cut didn't work. But, he said, he'd still support its extension if the wealthy keep their breaks, too.

"There's no evidence this temporary tax cut has produced any new jobs," Kyl argued, adding that he believes extending it would hurt Social Security, which is funded by the 6.2 percent payroll tax.

"This is what pays for Social Security benefits. It's bad economic policy, it's bad tax policy, and certainly the surtax that would fund this is something that would very much hurt small business and job creation," Kyl said, equating small businesses with the million-dollar-plus earners who would pay the surtax.

Yet he would maintain the payroll tax cut if Congress also extends the Bush-era income tax cuts, including those for the top brackets. Democrats have long favored keeping the lower Bush rates for most taxpayers, but not for the wealthiest.

"We should therefore only do it in circumstances that, in effect, override these objections -- one of which would be to extend all of the taxes that expire at the end of next year," Kyl said.

Kyl, the No. 2 Republican in the Senate, appears to be the first GOP leader to raise the prospect of repeating last year's hostage-taking, when Democrats caved in to GOP demands to extend the Bush-era and estate tax cuts for the rich in return for the payroll tax break, extended unemployment benefits and other breaks.

"As I said a year ago, I was willing to support the extension of it because we extended the other tax rates as well," Kyl said. "[If] we do that again, obviously it's something that I would be supportive of."

The Democrats' proposal to extend the payroll tax holiday, which includes the 1.9 percent surtax on incomes above $1 million to help pay for the $185 billion cost, would be deficit-neutral. Kyl's solution of extending all tax breaks would wipe out the pay-for and would cost at least an additional $70 billion or so a year, based on the price tag for last year's deal.

Kyl also said he'd be open to other ways to pay for a payroll tax extension, but it was unclear what those methods would be, since he voted against Senate Minority Leader Mitch McConnell's plan last week.